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There are two primary types of discounts that might occur in your small business -- trade discounts and cash discounts. A trade discount occurs when you reduce your sales price for a wholesale customer, such as on a bulk order. This type of discount does not appear in your accounting records or on your financial statements. A cash, or sales, discount is one you offer to a customer as an incentive to pay an invoice within a certain time. You must record cash discounts in a separate account in your records and report the amount on your income statement.

1. Debit the accounts receivable account in a journal entry in your records by the full invoice amount of a sale before a cash discount. Credit the sales revenue account by the same amount in the same journal entry. A debit increases accounts receivable, which is an asset account. Unlike an asset account, sales revenue is increased by a credit. For example, assume your small business sold $100 in products to a customer who will pay the invoice at a later date. Debit $100 to accounts receivable and credit $100 to the sales revenue account.

2. Subtract the amount of the sales discount from the full invoice amount to determine the amount of cash you receive when the customer pays the invoice. In this example, assume your customer received a 1 percent discount, or $1, for paying early. Subtract $1 from $100 to get $99 in cash.

3. Debit the cash account in a new journal entry in your records by the amount of cash you received from your customer. Debit the sales discounts account by the amount of the discount. A debit increases both of these accounts. In this example, debit cash by $99 and debit sales discounts by $1.

4. Credit the accounts receivable account in the same journal entry by the full invoice amount. This removes the invoice amount from accounts receivable. In this example, credit accounts receivable by $100.

5. Report the amount of total sales discounts for an accounting period on a line called “Less: Sales Discounts” below your sales revenue line on your income statement. For example, if your small business had $200 in discounts during the period, report “Less: Sales discounts $200.”

6. Subtract the total sales discounts from the gross sales revenue you earned in the period before accounting for discounts. Report your result as “Net sales” below the sales discounts line on your income statement. The amount of net sales is the actual revenue you earned after accounting for discounts. Using the previous example, assume you had $20,000 in gross revenue during the period. Subtract $200 from $20,000 to get $19,800 in net sales. Report “Net sales $19,800” below the sales discounts line.